SHANGHAI, April 19 (Reuters) - When Nissan Motor Co Ltd was preparing to launch the Venucia marque with itsChina venture partner two years ago, it sourced more componentslocally to keep costs down - and was sent mislabelled parts andsun visors that melted in the heat.

The quality of Chinese-made car parts has since improvedand, facing tougher competition in what is now the world'sbiggest autos market, Nissan and its Japanese rivals ToyotaMotor Corp and Honda Motor Co Ltd are havingto increase the locally made content in their cars.

This is a big step for Japanese automakers that have built aglobal reputation for quality through close relationships withknown and trusted suppliers, many of whom they own and controland with whom they jointly design and develop components.

But, at the fast-growth end of the Chinese market - thesub-$10,000, no-frills cars that appeal to a new generation ofdrivers - the Japanese are going bumper-to-bumper with localmanufacturers such as Geely as well as some globalbrands, and they need to contain their costs. This segment ofthe market is seen as a key battleground for all carmakers asgrowth is forecast at nearly 40 percent over the next two years.

Entering China a decade ago, Japan's automakers reliedheavily on parts from their affiliates, or "keiretsu" companies,which were often imported from Japan or elsewhere. To checkcosts, the automakers urged suppliers to shift production toChina - and Honda and Nissan say they can now secure more than90 percent of their car parts locally depending on brand. Buteven these parts made by "keiretsu" suppliers at Chinese plantsare more expensive than those from Chinese manufacturers as theyoften rely on materials imported from Japan.

Now, a firmer yen and a lingering anti-Japansentiment from a territorial row between Asia's two leadingeconomies last year are adding pressure for automakers to sourcemore parts from local Chinese suppliers.

Until now, the battle for the sub-$10,000 car market hasbeen between Chinese firms. But as the higher-end market iscrowded and volume sales are at the cheaper end, the entry-levelsegment is one that foreign automakers can no longer ignore.

TAKING ON KING KONG

To compete at the no-frills end of the market againstGeely's King Kong and GM's Chevrolet Sail, the Japaneseare having to keep costs down and step up their sourcing oflocal parts. In this, they are playing catch-up with U.S. andEuropean rivals, which already have more Chinese content intheir cars.

For example, Nissan, which has been the most aggressiveamong the Japanese in localising parts production at its plantsaround the world, can cut its costs for rear lamps on itsmade-in-China Venucia brand by around 40 percent by shopping atlocal suppliers. "GM and Volkswagen use these firmsand since we compete with them we'll lose out unless we also usethem," Yamazaki said.

LOCALS BOLDER

At the same time, local joint venture partners have beenemboldened since a row between China and Japan over disputedEast China Sea islets. The row triggered often violent protestsand battered sales of Japanese branded cars in China.

"The Japanese had to rely on their Chinese partners to dealwith the crisis ... and the Chinese have gained more influence,"said the head of one Japanese interior parts supplier to Hondain China. "The Chinese are pushing to bring in their ownsuppliers ... and business in China is all about relationships."

The quality of Chinese-made car parts has improved asmanufacturers gain experience, though many still fall short ofthose made by Japanese rivals, people in the industry say.

"During the trial stages in the lead-up to the Venucialaunch, we had quite a few problems that were unthinkable,"Yamazaki said, recalling how sun visors wilted and parts wereoften delivered with the wrong labels, prompting Nissan to sendin a team of Japanese engineers to work with local suppliers andensure products met the firm's high standards.

Yamazaki said parts made by Chinese suppliers currently makeup around 15-20 percent of Nissan branded cars in value terms,and the aim was to push that up to more than 35 percent.

"KEIRETSU" WARNING

So far, much of the localisation by Japan's carmakers hasbeen limited to firms supplying electrical and interior partsthat are considered less vital to car safety. The shift willimpact second- and third-tier supply firms more than the biggerJapanese auto parts providers such as Denso Corp andAishin Seiki Co Ltd.

"It's not our goal to 100 percent localise," Hondaspokeswoman Akemi Ando said in an emailed response to Reutersquestions for this article. Toyota's China-based spokesmandeclined to comment.

However, the Japanese "keiretsu" suppliers warn that morelocal parts will mean poorer quality cars.

"The carmakers will never admit that quality will drop, butit will. There's no doubt about it," said an executive at a mainJapanese supplier to Toyota, Nissan and Honda, who didn't wantto be named as he is not authorised to speak to the media.

"Sure, they're making suppliers provide samples and so on,but that's not bullet-proof. Things like the endurance of anauto part are very hard to check unless you actually apply themin cars on the road."